Determining the combined effect of financial system architecture, macroeconomic factors and governance on the development of local currency government bond market in Kenya

Abstract

This study sought to examine the current state of the local currency government bond market in Kenya to determine the effects of financial system structure, macro-economic factors and the country’s governance on its development. The study used secondary data from the World Bank’s WDI and DataStream databases for the period 1998 to 2019. Descriptive statistics - applying trend analysis, measures of central tendency and dispersion and documents analysis were employed to conduct a stocktaking of Kenya's government bond market development since its inception, while multiple linear time series regression using Ordinary Least Square (OLS) technique was employed to examine the determinants of the government bond market development in Kenya. In the findings, the combined model, corporate bond, political stability and general election were largely positively significant. Bank credit to the private sector and fiscal balance were positively significant, whereas inflation and interest capping were negatively significant at a 5 per cent confidence level. GDP_ growth rate was significant at 10 per cent. The study thus recommends that the government's efforts should focus towards building the financial markets, controlling its micro and macro-economic factors and building a strong administrative structure in its quest to achieve its Vision 2030 objectives of financial independence. It is this structure that will encourage bond market growth and liquidity that will, in future, enable them to achieve financial independence.